The focus of this dissertation is the European Credit Default Swaps (CDSs) market. CDSs are the most popular credit derivative products. Three issues are discussed, the first, which is covered in chapter 2, is the investigation of non-diversifiable jump risk in iTraxx sector indices based on a multivariate model that explicitly admits discrete common jumps for an index and its components. Our empirical research shows that both the iTraxx Non-Financials and their components experience jumps during the sample period, which means that the jump risks in the iTraxx sector index are not diversifiable. The second issue, which is covered in chapter 3 is the component structure of credit default swap spreads and their determinants. We firstly extract a transitory component and a persistent component from two different maturities of the Markit iTraxx index and then regress these components against proxies for several commonly used explanatory variables. Our results show that these explanatory variables have significant but differing impacts on the extracted components, which indicates that a two-factor formulation may be needed to model CDS options. The last issue, which is covered in chapters 4, 5 and 6 is the investigation of the linkage between the credit default swap market and the equity market within the European area. We innovatively calibrate the CDS option with the Heston Model to get the implied volatility in the CDS market, which allows us to investigate both the characteristic of implied volatility in the CDS market and the relationship of the two markets not only on the level of daily changes but also with regard to its second moment. Our analysis shows that the stock market weakly leads the CDS market on daily changes but for implied volatility, the stock market leads the CDS market. A VECM analysis shows that only the stock market contributes to price discovery. For sub-investment grade entities, the interactivities between the implied volatility of the CDS market and the implied volatility of the stock market are stronger, especially during the recent credit crunch period. All these results have important implications for the construction of portfolios with credit-sensitive instruments.

The focus of this dissertation is the European Credit Default Swaps (CDSs) market. CDSs are the most popular credit derivative products. Three issues are discussed, the first, which is covered in chapter 2, is the investigation of non-diversifiable jump risk in iTraxx sector indices based on a multivariate model that explicitly admits discrete common jumps for an index and its components. Our empirical research shows that both the iTraxx Non-Financials and their components experience jumps during the sample period, which means that the jump risks in the iTraxx sector index are not diversifiable. The second issue, which is covered in chapter 3 is the component structure of credit default swap spreads and their determinants. We firstly extract a transitory component and a persistent component from two different maturities of the Markit iTraxx index and then regress these components against proxies for several commonly used explanatory variables. Our results show that these explanatory variables have significant but differing impacts on the extracted components, which indicates that a two-factor formulation may be needed to model CDS options. The last issue, which is covered in chapters 4, 5 and 6 is the investigation of the linkage between the credit default swap market and the equity market within the European area. We innovatively calibrate the CDS option with the Heston Model to get the implied volatility in the CDS market, which allows us to investigate both the characteristic of implied volatility in the CDS market and the relationship of the two markets not only on the level of daily changes but also with regard to its second moment. Our analysis shows that the stock market weakly leads the CDS market on daily changes but for implied volatility, the stock market leads the CDS market. A VECM analysis shows that only the stock market contributes to price discovery. For sub-investment grade entities, the interactivities between the implied volatility of the CDS market and the implied volatility of the stock market are stronger, especially during the recent credit crunch period. All these results have important implications for the construction of portfolios with credit-sensitive instruments.

TESIS PARA OPTAR AL GRADO DE MAGÍSTER EN FINANZAS / Esta investigación se evalúa si los mercados de CDS (Credit Default Swap) de países emergentes son capaces de anticipar cambios en el rating de la deuda soberana. Se utiliza el rating soberano asignado por parte de las tres grandes agencias clasificadoras de riesgo y los Credit Default Swap soberano a 10 años, para una muestra compuesta por 27 países emergentes. Se utilizaron datos de frecuencia mensual para el periodo comprendido entre septiembre de 2008 y enero de 2018, en el cual se incluyen dos crisis financieras internacionales (crisis subprime y la amenaza de contagio de la crisis de deuda soberana de europa). El modelo econométrico consiste en una estimación en dos fases. En la primera, se estima a través de un modelo de regresión lineal de corte transversal el desalineamiento del spread de CDS de un país con respecto a sus pares de igual clasificación. En la segunda, se utiliza esta innovadora variable para estimar a través de un modelo probit con datos de panel la probabilidad de cambio de rating internalizada por el mercado de CDS. Se analiza de manera independiente los eventos de crédito que mejoran el rating (upgrade) y los que lo rebajan (downgrade). Se comprueba que, incluso utilizando diferentes supuestos para la construcción de las variables, los CDS son un instrumento financiero capaz de entregar información relevante para predecir cambios en el rating soberano. Además, mediante un conjunto de pruebas de robustez, se entrega sustento para dos principales conclusiones. Primero, que el mercado de CDS asignaría una mayor probabilidad de cambio de rating (tanto para downgrade como upgrade) a los países de peor clasificación crediticia y, más aún, a aquel grupo de países con grado especulativo. Segundo, los resultados muestran que a medida que se acerca la fecha del evento, el mercado contaría con mayor información para predecir cambios de rating, lo cual se podría esperar intuitivamente. Esta investigación realiza un aporte a la literatura previa tanto en el modelo implementado como su capacidad predictiva de cambios de rating, la cual se mantiene incluso frente a diferentes especificaciones de las variables explicativa relevantes y cambios en los supuestos utilizados.

In this letter we discuss the Credit Default Swap (CDS) market for European, Indian and US CDS entities during the financial crisis starting in 2007 using empirical First Significant Digit (FSD) distributions. We find out that on a time aggregated level the European and the US market obey empirical FSD distributions similar to the theoretical ones. Surprising differences are observed in the development of the FSD distributions between the US and the European market. While the FSD distribution of the US derivative market behaves nearly constant during the last financial crisis, we find huge fluctuations in the FSD distributions in the European market. One reason for these differences might be the possibility of a strategic default for US companies due to Chapter 11 and avoided contagion effects. / Series: Research Report Series / Department of Statistics and Mathematics

<p>Credit derivatives are very popular on financial markets in recent days.</p><p>The most liquid credit derivative is a credit default swap (CDS). In</p><p>this research we investigate methods for modeling and monitoring of the</p><p>price process of CDS. We study Hull and White model to calculate CDS</p><p>spread and have data for our analysis. We consider different methods for</p><p>monitoring of the price process of CDS. In particular we study CUSUM</p><p>method. And we calculate more commonly used perfomance measures</p><p>for this method.</p>

This paper seeks to investigate the reaction of credit ratings and credit markets in response to accounting restatements. Accounting restatements can often be perceived as a precursor to fraudulent activity, which could lead to a more negative credit rating, or a heightened credit default swap (CDS) price. CDS prove to be a useful measuring tool as they adjust to changes relatively quickly; much more quickly than the assessment of a credit rating agency. My results suggest that restatements do indeed have an effect on credit rating. It does, however take longer for credit ratings to be updated after the restatement, but CDS quotes move faster and are just as, if not more accurate. I also find that credit default swaps do not anticipate restatements, showing that while the credit markets are beating the rating agencies, they do not appear to be beating the accountants.

The credit valuation adjustment (CVA) on an over-the-counter derivative transaction is the price of the risk associated with the potential default of the counterparties to the trade. This dissertation provides an introduction to the concept of CVA, beginning with the required backdrop of counterparty risk and the basics of default risk modelling. Right and wrong way risks are central themes of the dissertation. A model for the pricing of both the unilateral and the bilateral CVA on a credit default swap (CDS) is implemented. Each step of this process is explained thoroughly. Results are reported and discussed for a range of parameters. The trends observed in the CDS CVA numbers produced by the model are all justified and the right and wrong way nature of the exposures captured. In addition, the convergence and stability of the numerical schemes utilised are shown to be appropriate. A case study, in which the model is applied to a set of market scenarios, concludes the dissertation. Since the field is far from established, a number of areas are suggested for further research. Copyright / Dissertation (MSc)--University of Pretoria, 2012. / Mathematics and Applied Mathematics / unrestricted

Credit derivatives are very popular on financial markets in recent days. The most liquid credit derivative is a credit default swap (CDS). In this research we investigate methods for modeling and monitoring of the price process of CDS. We study Hull and White model to calculate CDS spread and have data for our analysis. We consider different methods for monitoring of the price process of CDS. In particular we study CUSUM method. And we calculate more commonly used perfomance measures for this method.

Cette thèse présente dans un premier temps l’histoire récente et les enjeux de l’économie et du système financier indien. Puis, en se concentrant la période récente, elle étudie la question de l’intégration financière sur différents marchés : les marchés actions sont traités dans le 1er chapitre, les spreads des CDS indiens sont abordés dans 2nd chapitre et la relation entre les prix des matières premières et la politique monétaire est analysée dans le 3e chapitre. Enfin, le dernier chapitre pose la question de savoir si un secteur bancaire plus efficient peut aider l’économie indienne à sortir de la crise. Globalement, les résultats indiquent que les marchés étudiés sont plus intégrés depuis la crise, ce qui suggère une fragilité du secteur financier indien aux chocs extérieurs. Néanmoins, les résultats du chapitre 4 montrent, dans le cadre d’un modèle simple, que le système financier peut aussi permettre à l’économie indienne de surmonter ses déboires actuels, s’il l’on y implémente les réformes adéquates et que la productivité des banques est améliorée. / This thesis first presents India’s economy and financial system’s recent history and current issues. Then, with an emphasis on the recent turmoil period, it studies the question of financial integration in various markets: equity markets are dealt with in the 1st chapter, CDS spreads are analyzed in the 2nd chapter while the 3rd chapter focuses on the monetary policy-commodity prices nexus. Finally, the last chapter reflects on the ability of the banking system to help the country out of the current crisis. Overall, our results indicate that markets are more integrated since the crisis, which suggest a frailty of the Indian financial structure to exterior shocks. Nevertheless, results for chapter 4 show that the financial system could also allow the economy to recover if the proper reforms are implemented and that banking efficiency is improved.

Die vorliegende Dissertation ist in drei Themenblöcke unterteilt. Im Mittelpunkt des ersten Themenblocks steht die vergleichende Analyse der Fondsregulierung in den USA und Deutschland/der EU in Bezug auf Derivate und Verschuldung vor, während und nach der Finanzkrise 2007-2009. Ziel ist es, anhand der Darstellung der geltenden Regulierung und ihrer Anwendbarkeit auf die hypothetische Nutzung von Credit Default Swaps (CDS) durch Anleihefonds, aufzuzeigen, wie viel Flexibilität Fonds in beiden Ländern haben. Insgesamt ist der aus der Fondsregulierung erwachsende Spielraum im Hinblick auf den Einsatz von Derivaten und Verschuldung für Fonds in beiden Ländern hoch, so dass Fonds unbeobachtet ihre Zusammensetzung in Richtung risikoreicherer Kapitalanlagen lenken könnten. Der zweite Themenblock beschäftigt sich empirisch mit der Frage, in wie weit Fonds ihre Flexibilität tatsächlich ausnutzen. Als Erstes wird dabei untersucht, wie hoch das Verlustpotential der größten Fonds in den USA und Deutschland aus CDS ist. Ferner wird analysiert, ob Fondskommentare in Jahres- und Halbjahresberichten bezogen auf deren Nutzung von CDS mit den tatsächlichen CDS-Beständen konsistent sind. Basierend auf den Resultaten ist es zu empfehlen, nicht nur bestehende Regeln im Hinblick auf die spekulative Anwendung von Derivaten angemessen zu verschärfen, sondern auch die Publizitätspflichten in beiden Ländern weiter zu standardisieren. Unter Heranziehung umfangreicher Fondscharakteristika, insbesondere Managercharakteristika, untersucht der dritte Themenblock, was die Entscheidung der US Anleihefonds CDS zu benutzen, deren Nutzung zu erweitern sowie die Nutzungsweise beeinflusst. Ferner werden die exakten Typen von CDS, die von Anleihefonds gehalten werden, wie z. B. long oder short CDS, die sich auf Einzelnamen oder Gruppen von Titeln beziehen, aufgezeigt. / The thesis consists of three parts. The first part analyzes the regulation at the time surrounding the 2007-2009 financial crisis and after with respect to leverage and derivative holdings for mutual funds in the U.S. and Germany/the EU. After presenting a detailed overview of U.S. and German/European regulations, this study thoroughly compares the levels of flexibility funds have in both countries. All analyses reveal that under existing derivative and leverage regulation, funds in both countries are able to increase risk by using derivatives up to the point at which it is possible for them to default solely due to investments in derivatives. This makes the issue of regulation highly relevant for the public and regulators. The second part builds upon the first and empirically investigates the level of credit derivatives use by funds together with their communication toward investors. Firstly, the loss potential arising from investments into CDS for a sample of large U.S. and German mutual funds is analyzed. Secondly, it is investigated whether comments on CDS use contained in periodic fund reports are consistent with the disclosed CDS holdings. Based on the results, it seems advisable that regulators in both countries tighten rules restricting the speculative use of derivatives by funds to a reasonable level, as well as implement more standardized disclosure policies. The third part analyzes what determines whether U.S. corporate bond funds decide to use CDS in a particular period between mid-2004 to 2010, to which extent they use them and how, by relying on various fund characteristics including an extended set of manager variables. In addition, the types of various credit derivatives that funds use (e.g. long and short CDS on single-name or multi-name underlying positions) are presented. The results suggest that the characteristics of fund managers affect a fund’s risk taking via derivatives, in addition to fund fundamentals.